Suburban Propane Partners, L.P. — Fiscal 2023 Second-Quarter Form 10-Q
Business context and reporting period
Suburban Propane Partners, L.P. distributes propane, fuel oil and refined fuels, natural gas and electricity, and provides home-comfort services. It is also developing renewable natural gas (RNG) and other low-carbon energy investments. The unaudited filing covers the three and six months ended March 25, 2023, compared with March 26, 2022. Results are highly seasonal, with most retail fuel volume and operating profit generated during the October–March heating season.
Financial performance and key metrics
| Metric | Three months ended March 25, 2023 | Prior year | Change |
|---|---|---|---|
| Revenue | $526.5 million | $588.1 million | Down 10.5% |
| Operating income | $125.7 million | $192.0 million | Down 34.5% |
| Net income | $104.5 million | $175.1 million | Down 40.3% |
| Basic net income per unit | $1.63 | $2.77 | Down $1.14 |
| Adjusted EBITDA | $149.0 million | $172.5 million | Down 13.7% |
| Gross margin | $294.9 million | $349.1 million | Down 15.5% |
| Net margin | 19.8% | 29.8% | Down approximately 10.0 points |
For the six months ended March 25, 2023, revenue was $924.0 million, down 4.1%; operating income was $188.0 million, down 18.0%; net income was $149.9 million, down 23.7%; and Adjusted EBITDA was $239.0 million, down 7.7%.
- Second-quarter propane gallons sold declined 9.4% to 144.1 million gallons; fuel-oil and refined-fuel gallons declined 27.7% to 7.7 million gallons.
- Heating degree days were 12% warmer than normal and 5% warmer than the prior-year quarter. January and February were 16% warmer than normal and 11% warmer year over year.
- Average Mont Belvieu propane prices declined 37.4% year over year. Excluding derivative mark-to-market effects, propane unit margins increased approximately $0.04 per gallon, or 2.3%.
- Second-quarter operating expenses increased 6.7% to $127.5 million, while general and administrative expense increased 8.8% to $25.7 million. Inflation, payroll, vehicle costs, RNG operating costs and acquisition expenses contributed to the increases.
- Net interest expense increased 30.3% to $19.9 million, reflecting higher variable rates, higher revolving-credit borrowings and assumed Green Bonds.
- Net cash provided by operating activities for the first six months was $105.4 million, compared with $95.5 million in the prior-year period.
- First-half investing cash outflow was $137.5 million, including $24.0 million of capital expenditures and approximately $108.8 million for the RNG acquisition net of cash acquired.
Material changes versus the prior comparable period
- On December 28, 2022, the Partnership acquired two operating RNG production facilities and related development rights from Equilibrium for a total purchase price of $190.0 million, including assumed debt and accrued interest. The assets are located in Arizona and Ohio and generated higher “all other” revenue, but also increased operating, depreciation, amortization and acquisition-related costs.
- The acquisition added approximately $31.8 million of goodwill, $48.0 million of identifiable intangible assets and $80.6 million of Green Bonds to the balance sheet at March 25, 2023.
- Total assets increased to $2.35 billion from $2.10 billion at September 24, 2022. Long-term borrowings increased to $1.235 billion from $1.077 billion, primarily because of acquisition financing and higher revolving-facility borrowings.
- Derivative results shifted materially: the quarter included a $4.5 million unrealized loss versus a $33.0 million unrealized gain in the prior-year quarter. The first half included an $18.2 million unrealized loss versus a $0.5 million loss previously. Management excludes these non-cash effects from Adjusted EBITDA.
- Cash and cash equivalents were $7.2 million at March 25, 2023; including restricted cash, total cash, cash equivalents and restricted cash were $18.0 million.
Debt, liquidity and distributions
- Debt consisted of $350.0 million of 5.875% Senior Notes due 2027, $650.0 million of 5.0% Senior Notes due 2031, $80.6 million of 5.5% Green Bonds and $180.5 million outstanding under a $500.0 million revolving credit facility.
- The revolving facility had approximately $276.7 million of borrowing capacity after considering outstanding borrowings and letters of credit. Borrowings carried an interest rate of approximately 7.0% at March 25, 2023.
- The trailing twelve-month consolidated leverage ratio was 4.43x. The Partnership reported compliance with the covenants in its Credit Agreement and Senior Notes.
- Debt maturities after March 25, 2023 include $180.5 million in fiscal 2025, $350.0 million in fiscal 2027 and $730.6 million thereafter.
- A quarterly distribution of $0.325 per common unit, or $1.30 annualized, was declared for the second quarter and paid on May 9, 2023.
- Management expects sufficient funds for current and future obligations based on cash on hand, revolver availability and expected operating cash flow. Anticipated remaining fiscal 2023 cash requirements included approximately $8.3 million of maintenance capital expenditures, $24.8 million of growth capital expenditures, $41.1 million of interest and tax payments and $41.3 million of common-unit distributions.
Outlook, commentary, risks and unusual items
Management expects lower operating profits and potentially lower net income during the April–September off-season. Key operating sensitivities include weather, commodity prices, customer conservation, supply availability, inflation, labor and transportation costs, interest rates, competition, and the ability to pass through higher costs.
- Management expects the RNG platform and related joint venture to provide a long-term growth platform, but the projects remain subject to development, permitting, financing, operating, customer-demand and environmental-attribute market risks.
- A new RNG facility at Adirondack Farms began construction in fiscal 2023 and is expected to be completed within 18–24 months.
- The Partnership has investments in hydrogen and renewable dimethyl ether businesses, including a 25% stake in Independence Hydrogen and a 38% stake in Oberon Fuels, both of which involve development-stage or emerging technologies.
- A hypothetical 10% adverse change in commodity prices for open derivative positions at March 25, 2023 indicated potential additional future losses of approximately $3.7 million; management stated this is not a worst-case estimate.
- Self-insurance liabilities were $63.9 million, partially offset by a $15.8 million insurance receivable. The maximum potential payments under residual-value lease guarantees were $38.0 million, although their recorded fair value was de minimis.
- The Partnership stated that pending litigation was not expected to have a material adverse effect. An appeal remained pending in a previously dismissed electricity-pricing class action.
- Disclosure controls were deemed effective. Management excluded the recently acquired RNG assets from its interim internal-control evaluation under applicable SEC guidance.
Important facts for investors to verify
- Whether warmer weather and lower fuel volumes continue to pressure propane and fuel-oil earnings during future heating seasons.
- The acquired RNG facilities’ actual contribution to revenue, Adjusted EBITDA, cash flow and return on invested capital.
- Execution, funding requirements and contingent consideration associated with the RNG pipeline and related renewable-energy projects.
- Revolver utilization, variable-rate interest expense, leverage covenant headroom and the $180.5 million fiscal 2025 maturity.
- Sustainability of the $0.325-per-unit quarterly distribution relative to seasonal operating cash flow and available cash.
- Exposure to commodity-price volatility, derivative mark-to-market movements, supply disruptions, inflation, cybersecurity, regulatory changes and environmental-attribute pricing.